Turning uncertainties... into opportunities

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Turning uncertainties... into opportunities

In external debt distress despite impressive stabilisation

Event

Gambia’s external and public debt position is unsustainable and according to the IMF’s last ‘Debt Sustainability Analysis’, the country is considered to be in ‘debt distress’ again. Apparently, debt indicators have worsened since March 2018 due to the surfacing of more substantial debts incurred under the previous regime. Indeed, following years of massive theft and embezzlement under Jammeh’s authoritarian regime, the new democratically elected government is confronted with massive budgetary challenges. Nineteen months after the commendable political transition, Gambia’s distressed debt situation continues to be an important obstacle in addressing the small country’s enormous development needs.

Impact on country risk

The political situation has remained stable since the peaceful democratic transition in January 2017, while the government enjoys strong international backing and is supportive of structural reforms regarding institutions, business climate and infrastructure. However, it is a tiny and fragile economy, with a population of only 2.1 million and weak institutional capacity. GDP growth is projected to balance around 5% over the coming years, supported by international re-engagement and improved confidence leading to higher domestic consumption and a recovery in tourism. In fact, the May 2018 International Donor Conference for Gambia generated USD 1.5 billion in support of its 2018-2021 National Development Plan. The export base is small and mainly leans on remittances and tourism. As a result, Gambia’s capacity for obtaining stable foreign exchange revenues is limited and constitutes an important weakness, making it very dependent on foreign support. Consequently, Gambia has very restricted resources for servicing its external debts.

The new government inherited dire public finances with unsustainable government debts and distressed state-owned enterprises that constitute important contingent liabilities for the government. In 2017, Gambia’s public debt stock reached 129% of GDP (or 774% of government revenues) while that year’s public interest payments absorbed 42.5% of government revenues, reflecting the untenably public debt burden. Public debt is equally divided between domestic and external debt while the external creditor base is dominated by multilaterals and ‘plurilaterals’ (mainly the Islamic Development Bank) while non-Paris Club creditors (India, Kuwait and Saudi Arabia) are the major bilateral creditor group. External creditors were approached for debt restructuring and discussions are ongoing. The fiscal deficit in 2017 reached -7.9% of GDP, although it is expected to moderate down to -3.9% of GDP in 2018 under coordination of the IMF Staff Monitored Program. However, fiscal consolidation will be socially and politically challenging given the great development needs in this poor country. Either way, both debt relief and limiting new financing to highly concessional loans will be needed to restore Gambia’s debt sustainability. Due to the current debt distress situation, Credendo’s medium- to long-term risk classification remains in 7/7 for the time being.

Thanks to the political stabilisation and a reasonable increase of foreign exchange reserves, Credendo’s short-term political risk category for Gambia was again upgraded to category 6/7 in the end of 2017. In fact, foreign exchange reserves nominally doubled since their low point in 2016 and reached 3.4 months of import cover again in June 2018. The current account deficit (including official transfers) has nonetheless jumped up to an expected 18.2 of GDP in 2018 or 71% of current account receipts, projected to slightly moderate to 14.4% of GDP by 2020. Even so, thanks to a recovering inflow of donor and grant financing, together with increasing foreign direct investments (projected at 9% of GDP in 2018), the balance of payments is expected to be fully financed. This explains why foreign exchange reserves buffer should gradually continue to accumulate.

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